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Fortunehttps://s0.wp.com/wp-content/themes/vip/fortune/assets/images/fortunelogo.pnghttp://fortune.com25040Shareholder group demands board shake-up at McDonald’shttp://fortune.com/2015/02/13/shareholder-mcdonalds-shake-up/
http://fortune.com/2015/02/13/shareholder-mcdonalds-shake-up/#commentsFri, 13 Feb 2015 23:12:01 +0000http://fortune.com/?p=989981]]>A group that advises union pension funds has called on McDonald’s to shake-up its board, saying an upcoming CEO change will not be enough to lift it out its doldrums.

CtW Investment’s letter to the restaurant chain’s board Friday comes two weeks after the company announced Don Thompson would step down as CEO and be replaced in March by Steve Easterbrook, its chief brand officer who has been responsible for fixing the fast-food operator's marketing and menu.

After years of growth, McDonald’s has hit a rough patch: 2014 was the first year with a decline in same-store sales in more than a decade. Last quarter was also the fifth straight quarter of declining same-store sales in the United States, where it has lost many customers because of an overly complicated menu, changing tastes, and defections to fast casual chains like Chipotle Mexican Grill CMG .

The funds CtW advises own 2 million McDonald’s shares, or $190 million at Friday’s closing price and 0.2% of the company, and invest over $250 billion in the global capital markets.

“At this juncture, we believe it is critical for McDonald's to have strong, independent board leadership,” CtW Executive Director Dieter Waizenegger wrote in the letter. “Fresh eyes are essential to drive the overhaul of the board's composition, form a productive partnership with CEO Easterbrook in tackling the company's strategic challenges, and restore the trust of long-term shareholders.”

CtW is calling on McDonald’s MCD to come up with and publicly disclose plans to change the board’s leadership, and set up a board succession plan. The group faulted the board for having members who’ve been directors for too long- the average tenure has been 13 years– and for being to insular and tied to Chicago-area networks.

CtW made headlines last year with its opposition to the now concluded merger between Walgreen and Alliance Boots.

CtW said McDonald’s has been “complacent in not refreshing its membership earlier” given how much restaurant-going habits have changed, and pointed to how Coca-Cola KO, Starbucks Coffee SBUX and PepsiCo PEP have been better at refreshing their board composition in the last few years.

“We respect and take seriously the views of all of our shareholders. The Board of Directors recently added a highly qualified new Director, appointed a new Chair of the Governance Committee and has made several senior management changes. Our Board is experienced, independent and committed to maximizing shareholder value,” McDonald’s said in a statement.

]]>http://fortune.com/2015/02/13/shareholder-mcdonalds-shake-up/feed/0Most Admired 2015 — McDonaldpwahbaHow McDonald’s Don Thompson could have saved his jobhttp://fortune.com/2015/02/10/how-mcdonalds-don-thompson-could-have-saved-his-job/
http://fortune.com/2015/02/10/how-mcdonalds-don-thompson-could-have-saved-his-job/#commentsTue, 10 Feb 2015 16:38:28 +0000http://fortune.com/?p=983357]]>Last week, Don Thompson announced he would retire as McDonald's president and CEO after less than three years at the helm. Thompson is being blamed for almost all of the fast-food chain's troubles: confusing the menu; not letting customers customize enough; not riding the healthy food trend; undermining children's well-being; flip-flopping on America's minimum wage debate; adding products that extended wait times; food safety scares abroad, declines in same-store sales.

In all seriousness, however, as investors, analysts and pundits are expected to eventually line up to scrutinize moves by his successor, Steve Easterbrook, it's a good time to remember that McDonald's MCD is a lot bigger than Thompson, and a lot bigger than Easterbrook. The chain employs more than 1.5 million employees in about 120 countries. In its mission statement, the first words in the company's plan to provide "an exceptional customer experience" is 'people.' That includes employees, who have the lead role in achieving McDonald's mission and Thompson should have given his employees more tools to do just that.

Here's what I, as President and Co-Chairman of a management consulting firm, always want to ask ousted CEOs like Thompson: What if you had focused on your people by using, as your governing principle, what I call the 'success triangle,' which asks whether a company has a clear vision that employees are capable of achieving. If not, it would be wise to ask why and how can a leader make them capable?

It appears Thompson did not take these measures. Let me explain.

Most companies work hard to successfully articulate a clear mission. McDonald's mission is as clear as a bell, but if I were a McDonald's employee, I would probably also wonder exactly what that mission means for my job? When employees are asked to alter a process, raise their performance, or deliver an improvement, you can incentivize them all you like, but the needle won't move unless you articulate the precise change you desire at the granular level for each employee.

How can managers do that? For starters, they must let employee know what they are doing right that they need to do more of; what they are doing wrong that they need to change; what they are doing too much of that they should be doing less of. That's it. Those are the only levers employees have to pull to meet management's objectives. Training is also essential, but does it make employees capable? No, it just shows them how to follow processes. It does not give them the time or resources to change their behaviors. Lacking those things, training has an immediate impact but it's unsustainable. Weeks or months later, you'll hear managers fretting, They know what to do, so why aren't they doing it?'

It's reasonable to question whether the success triangle may be more difficult to embed in a business like McDonald's that is heavily dependent on its franchises. I would say no. Independent franchisees are just another constituency of leaders that a CEO must hold accountable to minimum, non-negotiable corporate standards. When that happens, the franchisee's employees are in turn motivated to achieve the CEO's vision and capable of doing so.

I'm not a McDonald's insider, but if Thompson didn't use clear, capable and motivated thinking to diagnose his company's product and efficiency worries and pass the importance of those traits onto his employees, then it's time for a new leader to step in so McDonald's can truly get behind their slogan, "I'm lovin' it.”

It reported that global same store sales were down by 4.8%, versus the expected 1.2% dip. Its once high-growth Asian markets were down 12.6% versus the expected 8.4% drop.

Indeed, it is an ironic time for the $72 billon burger business, where 12 hours after the 65 year-old McDonald’s MCD fired its CEO Don Thompson, Danny Meyer, founder of 14 year-old Shake Shack SHAK, fired up his burger chain on the New York Stock Exchange with a $1.7 billion value, doubling its IPO price of the day.

Yes, McDonald’s is the big cheese in this market, with 68 million people served daily in 130 countries, 38,000 outlets, and 2 million employees. Despite that presence, diners and investors alike have flipped over the higher quality, fun entrants such as Shake Shack, Five Guys Burgers and Fries, In and Out Burger, and Smashburger. But despite the company’s stumbles, McDonald’s may now be posed to start firing back.

Despite strategic and operational missteps shared by the fast food giant’s management and board, there was no sugar coating over the need for change nor was there a vilification of the company’s beloved, albeit unsuccessful, leader. Moreover, the company’s Chicagoland-oriented board did not need outside activist investors to force needed changes.

McDonalds’ missteps are more complex than its distasteful financial results. Recent results showed the first declining same store sales in 12 years and the fifth straight quarter of declining sales revenues and a plunge in profits. These financial records reveal problems in the company’s strategy, execution, and leadership, not an industry-wide problem. In addition to the soaring prospects of its competitors, even McDonald’s spinoffs--Boston Market (2007) and Chipotle Mexican Grill (2006)--were positioned for success when they were liberated.

In short, McDonald’s has been caught in a whirlwind of confusing brand identity paradoxes; a situation in which the company's inadequate products, confusing messaging, and overly humble messengers have aggravated its sinking public image. Consider these five quandaries:

1. Food quality. The fast-food chain’s tries at healthier menu options did not work. Now people associate McDonald’s with the hamburgers with "pink slime filler" (ammonium hydroxide), which the company only discontinued in 2011 amid an expose by celebrity chef Jamie Oliver. How sad that the company’s burgers were once endorsed by leading nutritionists, such as Jean Mayer, as a healthy, rare treat! In June 2014, Consumer Reports cited McDonald’s as the purveyor of the worst-rated burger in the nation. Wendy's now fares better on account of its low prices. Meanwhile, a double Shackburger, fries, and black & white shake would ring the bell with 2,000 calories, far more calories than what you’d get from similar items at McDonald’s.

2. Food safety. Long revered for its food safety in Asia and China in particular, as well as the Middle East, McDonald’s and Yum Brands have lost credibility as they had to close a meat processing facility in 2014 for continuing food safety problems

3. Pricing policy. In its attempts to woo people away from the cheap dollar menu items and value meal offers toward high quality food, traditional customers were confused if price was the focus or not. Now it is Sonic Burger, not McDonald’s, that leads in simplicity and low prices.

4. Standardization vs. customization. McDonald’s was long criticized for not allowing customers to "have it your way." So they swung to the opposite end of the pendulum, offering so many varieties that customers were confused by more than 130 items while service speeds--a key ingredient for fast food--slowed dramatically.

5. Supplier sourcing. Once a master of sourcing channels to the point that it appeared like a supply chain hegemon, McDonald’s was ambushed by slowdowns at the Port of Los Angeles, without any effective contingency plan. This left the fast-food chain French fry-less in key markets, like Japan.

McDonald’s attempted to respond to the loss of business over these image, quality, positioning, and operations problems, with band aid solutions. Expanding the number of drive-thru windows, which accounts for 70% of its business, and the current weird campaign about "showing love" do not address the deeper problems in food quality, operations, and image. In fact, McDonalds’ schmaltzy Super Bowl "Pay it with Lovin'" campaign was met with ridicule and continues to backfire all the way to its planned expiration on Valentine's Day.

Yet an even deeper problem had to do with the company’s succession drama. Indeed, McDonald’s has had five CEOs in a dozen years. The universally respected and experienced operator Don Thompson was not the board's intended successor. In fact, he was their third choice candidate.

CEO Jim Skinner’s presumed successor, Mike Roberts, quit in 2006, reportedly complaining that Skinner was not clear enough about his intended succession schedule. Another initial favorite was Ralph Alvarez, who had to "retire" due to a sudden concern over his knees, at age 55, with a single day's notice in 2009. The news shocked the company, as he left the company in the aftermath of a second wave of rumors over personal conduct problems. Published allegations of serial sexual misconduct with subordinates forced Alvarez’s exit when he was previously fired by CEO Jack Greenberg.

Skinner himself was not expected to take the reins as CEO. He came into the job after two McDonald’s CEOs died young. James R. Cantalupo died of a heart attack, and his successor, Charles H. Bell, left with cancer. (Bell died in January 2005.)

Cantalupo’s predecessor, Jack M. Greenberg, stepped down at age 60 after his successful introduction of a "made for you” campaign, with mildly customized products. The initiative was introduced at a time when McDonald’s suffered earnings declines for seven consecutive quarters, a similar situation to what Don Thompson encountered.

Shareholders were initially unimpressed with Cantalupo and Bell’s appointments, as it suggested that the company was suffering from inbreeding. During Bell’s short time as CEO, McDonalds’ was being criticized for the health of its food. This was exacerbated by the release of the documentary film Super Size Me. Bell led efforts to add healthier choices to the McDonald’s menu, allowing parents to substitute juice and apple slices for fries and soft drinks. The “Supersize" option was also eliminated. During his brief tenure, Bell’s initiatives resulted in a successful turnaround, with the firm’s stock price rising 24% during his brief reign. Bell also introduced the McCafe and the strikingly tasty Newman's Own coffee.

When Bell's health declined, Jim Skinner stepped up. Skinner's greatest accomplishment, the “Plan to Win” strategy, managed to reverse McDonalds’ falling profits. Skinner’s strategy focused on improving operations at existing locations instead pursuing the expansion models of the company’s past. The company hoped to achieve "faster, friendlier service; tastier food; a more appealing ambiance; better value; and sharper marketing." Skinner and his team were able to increase McDonalds’ total sales, increasing from $50.1 billion in 2004 to $70.1 billion in 2008.

In fact, there were terrific stars positioned just below the surface through much of this period, such as CFO Matt Paull and Jeff Kindler, former general counsel and CEO of such McDonald’s units as Boston Market. (Kindler left McDonald’s to serve as general counsel and then CEO of Pfizer.) One of these stars in the McDonald’s pipeline is Steve Easterbrook, now the company’s newly anointed CEO. Easterbrook left the company to run other European food chains, giving him valuable outside perspective. In this sense, Easterbrook’s trajectory marks a similar path to former Coca-Cola CEO Neville Isdell.

Easterbrook seems to be a superb choice--as a brand steward and past top operating executive in Europe, he led triumphant turnarounds and engineered the very successful introduction of organic, healthy foods in the core menu. He also introduced modern, attractive store designs and championed promising digital strategies.

So, while the company has made some honest mistakes, there is no governance failure at McDonald’s, beyond, perhaps the somewhat overly Chicago-oriented board. They have recognized the need to admit mistakes and change leadership without vilifying hardworking officials who swung at the pitch but missed. In addition, McDonald’s did not need media campaigns or proxy battle drama to make change. The McDonald’s board has invested in deep bench strength, giving the company prepared, credible leaders to take charge with little internal chaos and external confusion.

Jeffrey Sonnenfeld is Senior Associate Dean for Leadership Studies and Lester Crown Professor of Management at the Yale School of Management, as well as President of the Yale Chief Executive Leadership Institute

]]>http://fortune.com/2015/02/09/mcdonalds-deserves-a-break-today/feed/0worlds-most-admired_mcdonaldssolster2McDonald’s CEO ouster: A sign of tougher, less patient boardshttp://fortune.com/2015/01/29/mcdonalds-ceo-ouster-boards/
http://fortune.com/2015/01/29/mcdonalds-ceo-ouster-boards/#commentsThu, 29 Jan 2015 16:32:28 +0000http://fortune.com/?p=966798]]>On Wednesday, the McDonald's MCD board announced the retirement of its chief executive Don Thompson and the elevation to CEO of chief brand officer Steve Easterbrook, who had led the fast-food giant's UK and European units.

The news is simply one example in a string of CEO departures since the third quarter of last year that puts on full display the growing power of corporate boards today--and their newfound willingness to exercise that power.

Along with the top management shuffle, directors at McDonald's also appointed Google's president of the Americas, Margo Georgiadis, to the board. Her expertise should strengthen the board's ability to assess the company's progress in improving its digital strategy. As Sanofi ADR chair Serge Weinberg told me in an interview regarding the high-profile ouster at that company late last year, strengthening the board goes hand in hand with replacing a CEO.

What's different than in the past, though, is that now boards are orchestrating their own succession rather than allowing the new CEO to take care of that.

Boards can more easily take these decisive actions because many companies now have separated the CEO and chair positions. As many directors will attest, it's hard to take control of succession when the CEO runs the board. Sanofi had a separate chair, and Andy McKenna has been non-executive chair at McDonald's since 2004, according to the company's website. Abercrombie ANF and Bob Evans BOBE were both under fire from activist investors when the boards of those companies stripped the CEO of the chair position; that is, before those chief executives were ultimately ousted.

But why are boards increasingly taking these actions? Late last year, a board member at a mid-sized insurer put it this way. Boards are tired of looking at CEO paychecks, which are enormous compared to what companies are getting in return for all that pay. It's just not adding up anymore, this director told me.

The huge paychecks have become a double-edged sword for CEOs. "If you want big money," boards are increasingly saying, "we want to see big things."

Exorbitant CEO pay not only widens the divide between workers and the C-suite, it is also creating enormous wealth gaps between CEOs and many board members. In that way, many board members today, those who are hired for skill rather than celebrity, are somewhat more in touch with economic realities than the CEOs they oversee.

Whether the McDonald's board fully understands that its reputation for low pay has damaged its prospects remains to be seen. But from a practical standpoint, it is difficult to address "operational excellence" when the fast-food company's workforce is struggling to make ends meet. It's not clear from the recent discussions that this issue has received sufficient attention from the McDonald's board.

While it's true that many boards are slow to act against the CEO, the move by McDonald's serves as a bellwether of a new reality in corporate governance. More and more boards will not simply wait for activist shareholders to come knocking. They are increasingly willing to start remodeling their companies themselves.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com), an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and is the author of two books on corporate governance and valuation.

]]>http://fortune.com/2015/01/29/mcdonalds-ceo-ouster-boards/feed/0US-BUSINESS-MCDONALDSsolster2Why time ran out for McDonald’s CEOhttp://fortune.com/2015/01/29/why-time-ran-out-for-mcdonalds-ceo/
http://fortune.com/2015/01/29/why-time-ran-out-for-mcdonalds-ceo/#commentsThu, 29 Jan 2015 14:26:13 +0000http://fortune.com/?p=966239]]>Just last week McDonald’s CEO Don Thompson made the case for more time to turnaround the troubled company during his year-end earnings calls.

His board, it appears, gave him a resounding “no.” Yesterday Thompson announced he will step down from the job after two-and-a-half years, a period marked by sliding sales and mounting pressure on the brand. Fortune chronicled McDonald’s MCD woes in November, which you can read about here. The company’s stock was up more than 3% in after-hours trading yesterday.

The official word out of McDonald’s Oak Brook, Ill., headquarters is that Thompson, 51, is “retiring.” But it’s pretty clear that he didn’t make this choice alone. When the company reported earnings last week, 2014 became the first year since 2002 that the fast-food behemoth suffered a global decline in sales at outlets open for at least a year. As Sanford Bernstein analyst Sara Senatore wrote in a note today: “While we understand that the timing was determined by Thompson, there is no doubt in our mind that he was under increasing scrutiny by investors and therefore the board.”

So after five quarters of declining same-store sales in the U.S. market, why now? Nonexecutive chairman Andrew McKenna told Fortune in the fall, "We're very supportive of Don. We see the leadership team moving forward with a sense of urgency, which is good." But McKenna and his fellow directors were starting to feel the pressure as the press increasingly focused on its role in the company’s struggles. On Friday, for example, Jim Cramer took the board to task on CNBC, demanding, “When will someone finally be held accountable for this kind of sub-par performance and why do corporate boards tolerate these mistakes, keeping the flailing CEOs of these two companies [McDonald’s and UPS] around for still more earnings seasons?” He concluded that both companies would create value immediately if their CEOs left.

Thompson’s successor, SVP and chief brand officer Steve Easterbrook, joined the company in 1993 but left in 2011 to become CEO first of Pizza Express and then Wagamama, both UK-based restaurant brands. Thompson brought him back in 2013, telling Fortune in October, “I love the fact that he had experience sitting in a CEO chair. It broadened his purview of business in general.” Two years away may very well give him an outsider’s perspective at a notoriously insular company like McDonald’s, but it might not be enough time away to give him the kind of fresh thinking that the chain needs to accomplish an incredibly daunting task. As we wrote in November:

[McDonald’s] has risen to the top of the fast-food chain by being comfortably, familiarly, iconically "mass market" and so ubiquitous as to be the Platonic ideal of "convenient." Neither of these selling points, however, is as high as it was even a decade ago on Americans' list of dining priorities. A growing segment of restaurant goers are choosing "fresh and healthy" over "fast and convenient," and McDonald's is having trouble convincing consumers that it's both. Or even can be both.

In recent months, as the problems became more evident, Thompson took the tack of trying everything all at once. He was pushing digital investments, a build-your-own-burger platform, and a simplified menu, while also allowing regions to localize their offerings. To be fair, Thompson inherited plenty of the company’s issues, like menu bloat, but he certainly didn’t make them better and made some of them, like issues involving pricing, he made worse.

One big advantage Easterbrook has over Thompson is that he faces a completely different set of expectations. Thompson had the unenviable job of taking over the company after it enjoyed an incredible run. His predecessor, Jim Skinner, had eight years of consecutive positive same-store sales growth, a nearly 50% increase in revenue, and a more than doubling of profits. In 2011 McDonald’s was the top-performing stock in the Dow for the one- and five-year periods. By contrast, Easterbrook takes the helm during an historically abysmal time for the brand. As Nation’s Restaurant News has reported, this year was the first time in at least 30 years that sales at the company’s U.S. business declined, ending the longest run ever of domestic restaurant sales growth for a single chain.

On his very first earnings call after he was announced as CEO in 2012, Thompson was asked what he thought his legacy would be. “First of all, I hope that retirement point is quite a few years down the road. Otherwise, that might mean it was induced by something other than me,” he said, adding, “I’ve been around McDonald’s for over 20 years now and I think what’s most important for everyone is to understand that a change in leadership doesn’t mean a change in strategy.”

This time, investors have to hope, a change in leadership will mean a change in strategy.

]]>http://fortune.com/2015/01/29/why-time-ran-out-for-mcdonalds-ceo/feed/0CEOs hot seat — Don Thompson 2014bkowittHere’s what people are saying about McDonald’s ousting its CEOhttp://fortune.com/2015/01/28/heres-what-people-are-saying-about-mcdonalds-ousting-its-ceo/
http://fortune.com/2015/01/28/heres-what-people-are-saying-about-mcdonalds-ousting-its-ceo/#commentsThu, 29 Jan 2015 00:07:56 +0000http://fortune.com/?p=965852]]>News broke on Wednesday that McDonald’s is ousting its CEO, Don Thompson, after sales continued to decline. The embattled CEO was the subject of a recent Fortune feature by Beth Kowitt. He’ll be replaced by Steve Easterbook, the company’s chief brand officer.

The company said on Wednesday said Thompson would step down as CEO and board member on March 1, and be replaced by Steve Easterbrook, its chief brand officer who is responsible for fixing the fast-food operator’s marketing and menu. A longtime McDonald’s veteran, Easterbrook earlier in his career held big jobs including president of McDonald’s Europe.

The move comes a week after McDonald’s, the world’s biggest restaurant company, reported fourth-quarter and full-year results that made 2014 the first with a decline in same-store sales in a dozen years. It was also the fifth straight quarter of declining same-store sales in the United States, where it has lost many customers because of an overly complicated menu and changing tastes, and a defections to fast casual chains like Chipotle Mexican Grill CMG.

McDonald’s is trying to quickly turn things around, aiming to simplify its menu and by unveiling a new marketing message centered around the word "love." But Thompson, who became CEO in 2012, himself acknowledged last week that turning the company around would take time and said that he expected the volatility in McDonald’s results to continue in 2015. While Thompson inherited many problems when he took the helm, he has yet to change the company’s trajectory.

McDonald's has had trouble weaning customers off of its inexpensive Dollar Menus, creating a chasm between its lower price items and its premium offerings while damaging the chain’s image, the company has acknowledged. As part of its turnaround efforts, McDonald's is currently testing "Create Your Taste," which let customers personalize their burger, a key part of fixing McDonald's image problem. But the company has its work cut out for it: a reader poll by product testing organization Consumer Reports released in July found McDonalds burgers ranked as the worst in the U.S.

In addition to Thompson’s departure, the company also announced that Chief Financial Officer Pete Bensen will take on the newly-created role of Chief Administrative Officer, overseeing functions that support operations.

]]>http://fortune.com/2015/01/28/mcdonalds-ceo-out/feed/0MCD12.01.14.McDonalds.01pwahbaMcDonald’s CEO: Give us time for a turnaroundhttp://fortune.com/2015/01/23/mcdonalds-ceo-give-us-time-for-a-turnaround/
http://fortune.com/2015/01/23/mcdonalds-ceo-give-us-time-for-a-turnaround/#commentsFri, 23 Jan 2015 21:38:26 +0000http://fortune.com/?p=958954]]>The only good thing about 2014 for McDonald's MCD is that it's finally over.

As Fortune detailed in November, this has been a terrible, horrible, no good, very bad year for the iconic fast food giant. Today the company capped it off by reporting fourth-quarter and full-year results that made 2014 the first year since 2002 in which it reported a decline in global same-store sales.

The year was historically bad for McDonald’s U.S. business in particular. Nation's Restaurant News reported last week that the company’s slump in the U.S. market would be the first time its numbers waned compared to the year before in at least 30 years, ending the longest run ever of domestic restaurant sales growth for a single chain.

On the earnings call today CEO Don Thompson cited a litany of actions the company is taking to turn things around, including localizing its menu, allowing patrons to customize their burgers, and launching fresh marketing. He stressed that McDonald’s is "acting with a sense of urgency"--but he also made the case for giving management more time for a turnaround to kick in. He noted that McDonald's is only six months into the 12- to 18-month plan he outlined in July.

“History tells us that these efforts will take time to resonate,” Thompson said on the call, “[and therefore] expect continued volatility in the market through most of 2015.” As he put it, “2015 will be a year of regaining momentum globally…. It will take time, especially in larger markets to notice the comprehensive changes that are under way." He warned that the company would continue to feel pressure on sales and earnings in the first half of the year, with negative same store sales already expected for January.

Thompson certainly inherited some of the company's issues, such as menu bloat, which had been a long time in the making when he became CEO in July 2012. Thompson had to report a slowdown in sales growth in most major markets his very first quarter on the job, but he's now had two and a half years to change the company's trajectory and the arrows keep pointing the wrong direction.

One promising sign, perhaps, came from a subtle shift in what McDonald’s said about food quality--a sensitive issue for the company. McDonald’s management has always maintained that its food is excellent, arguing that it was a simply a perception problem; the company, it said, just needed to do a better job educating consumers about its ingredients and how they’re prepared. But this time Mike Andres, president of the U.S. business, acknowledged on the call that "we have to make sure our quality aligns with consumers' definition of quality moving forward. And so we’re going to be very agressive in that area." He said that he's building culinary talent and bringing in outside consultants to help with “menu vision.”

It was an important acknowledgement. But the company’s challenge remains daunting. It needs to simultaneously pare its menu, improve its offerings, increase its speed, and hone its message--a combination of factors that will be hard to pull off, particularly in a world where many customers are craving healthier offerings.

]]>http://fortune.com/2015/01/23/mcdonalds-ceo-give-us-time-for-a-turnaround/feed/0rtr45jjibkowittMcDonald’s to cut menu items in bid to regain ‘burger leadership’http://fortune.com/2014/12/10/mcdonalds-menu-cuts/
http://fortune.com/2014/12/10/mcdonalds-menu-cuts/#commentsWed, 10 Dec 2014 18:06:51 +0000http://fortune.com/?p=899014]]>McDonald’s MCD is going to dramatically simplify its menu next month as a major part of its strategy to halt a U.S. sales slide that has gotten worse of late.

McDonald’s USA president Mike Andres said on Wednesday at an analyst meeting in Oak Brook, Ill., that the world’s largest restaurant company would remove eight items altogether from its menu and would only offer 11 extra value meals, rather than 16, to address a chronic criticism customers and investors alike have lobbed at it: service that is bogged down as workers struggle with learning and preparing too many menu items.

Earlier this week, McDonald’s reported that U.S. same-restaurant sales fell 4.6% in November, its worst decline in 14 years, continuing a streak of 14 months without growth. And the U.S. was not its only weak market- comparable sales were down 2.2% globally last month.

The pared-down menu is part of what Andres, who returned to McDonald’s in August to stem the U.S. sales slide, called the chain’s effort to regain its “burger leadership.” And the idea is for McDonald’s to be more nimble to changes in customer habits.

While neither Andres, nor his boss, CEO Don Thompson, were specific about what would be cut, Thompson noted that items like the McWrap sandwich take a lot of time to make. He also said that he could pare permutations of a same item.

The pressure is on Thompson, two years into his tenure, to show McDonald’s can revitalize a hamburger giant seen as pass? by many customers in an era that has seen the ascendance of Chipotle Mexican Grill CMG and Panera Bread PNRA. McDonald’s has also been bested by rivals Wendy’s WEN and Burger King BKW in terms of sales growth.

Andres conceded that McDonald’s problems were such that the company had to move decisively.

"We are not going to re-energize this business by taking incremental steps," Andres said.

McDonald’s has had trouble weaning customers off of its inexpensive Dollar Menus, something that deepened the price disparity between its lower price items and its premium offerings, and damaged the overall image of the restaurant, said Andres, who started at McDonald’s 32 years ago, with a short interruption as CEO of Logan's Roadhouse steak and burger chain. He returned to McDonald’s in October.

As part of its turnaround efforts, McDonald’s is currently testing “Create Your Taste,” which allows customers to personalize their burger, a key part of fixing McDonald’s image problem. But it has its work cut out for it: a reader poll by product testing organization Consumer Reports released in July found McDonalds burgers ranked as the worst in the U.S.

Andres also wants to enhance McDonald’s offering by being "more culinary inspired" and having items with shorter ingredient labels.

But either way, Andres and Thompson tacitly acknowledged long-time criticisms of the company and practically sounded the alarm to make it clear the company needs to move decisively.

“The pace of change outside of McDonald's has become faster than perhaps the pace of change internally," Andres said.

]]>http://fortune.com/2014/12/10/mcdonalds-menu-cuts/feed/0174339327pwahbaWhere does the buck stop at McDonald’s? Look no further than the board.http://fortune.com/2014/12/10/mcdonalds-board/
http://fortune.com/2014/12/10/mcdonalds-board/#commentsWed, 10 Dec 2014 12:00:38 +0000http://fortune.com/?p=896932]]>The heat on McDonald's just got turned up a notch.

On Monday the company reported a 2.2% decline in global same store sales for the month of November, with the U.S. market taking the biggest hit (-4.6%). The Wall Street Journal reported that the drop in the U.S. was the biggest in more than 14 years.

I detailed McDonald's woes last month, noting that the pressure was mounting on CEO Don Thompson to turn around the fast food giant. But with no relief in sight, investors may soon turn their attention to the McDonald's board.

Leading the group is Andy McKenna, the company's non-executive chairman since 2004 and a director since 1991. McKenna is a Chicago heavy hitter, who has been called "the power behind the throne" by the hometown press. Chicago Magazine has put him on its list of the 100 Most Powerful Chicagoans, describing him as "a bigwig other bigwigs seek out for advice." He has chaired the White Sox and Cubs, and is now on the board of the Chicago Bears. He has also sat on countless other civic and corporate boards, including the University of Notre Dame and the Big Shoulders Fund of the Archdiocese of Chicago.

According to company filings, McKenna planned to leave the board in 2003 when he reached McDonald's mandatory retirement age for directors of 73. But in the interim the company went through a CEO handoff, and the board asked McKenna to stay on to aid in the transition.

The following year McDonald's loosened the retirement rule in its proxy, saying that the board "may nominate existing members of the board over the age of 73 as candidates in exceptional circumstances." McDonald's was then struck by misfortune in its leadership ranks. CEO Jim Cantalupo died of a heart attack while in the job. His successor, Charlie Bell, was then diagnosed with colon cancer and resigned.

By 2007, when two additional board members hit 73, the language about mandatory retirement had disappeared. McKenna has now overlapped with the tenures of six different McDonald's CEOs.

As of the most recently filed proxy, three board members were over 73: McKenna (listed as 84), Walter Massey (76), and Roger Stone (79). MSCI ESG Research, which provides data on governance, found that the average age of a director at McDonald's is about 63, the oldest in its peer group. Compare the figure with Burger King (about 50), Starbucks (about 58), and Yum Brands (about 59). McDonald's directors also have a longer tenure (12 years) than those on other big restaurant company boards (eight years).

A similar spread can be found when one compares McDonald's with an even bigger corporate universe, such as the S&P 500. Larry Fauver of the University of Tennessee's Corporate Governance Center found that the average number of years served by a director at McDonald's was 12.5 versus 9.5 for the broader index. "That's a fairly significant difference," he told me.

Why does this matter? In a few words: connection to the company's customers. While octogenarian and late septuagenarian directors may have more seasoning and worldly experience than young Turks, there is an argument to be made that they may not be quite as in touch with the two demographic segments that McDonald's really needs and is struggling to attract: millennials and young families. "That’s why you need a refreshed board," says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "You need to take fresh looks."

Fauver adds another concern: Board members who have been around that long may not have enough distance from management to be objective about the company's performance and challenges. "How independent are you after 23 years?" Fauver asks.

I spoke with McDonald's chair McKenna briefly for my November story, in which he told me that the board is "very supportive" of CEO Thompson. I also asked McKenna about the board and its tenure. He replied that that he didn't think length of service had deprived any of the directors of their independence. McDonald's did not respond to a request for comment in time for publication of this story.

In its proxy, the company notes that 12 of 13 of its directors are independent--Thompson being the exception. But there are a couple of interesting connections between the company's directors that go beyond the McDonald's boardroom:

–The vast majority of McDonald's board members are based out of Chicago. (That's not very geographically diverse for a truly global company.)

–Jeanne Jackson, a Nike executive, overlapped on the Nordstrom board with Hernandez from 2002-2009. Hernandez became Nordstrom's non-executive chairman in 2006. They have overlapped on the McDonald’s board together since 1999.

–Directors Roger Stone and McKenna at one time both ran companies that were suppliers to McDonald's, even as they sat on McDonald's board of directors.

–McDonald's CEO Don Thompson was a director of the utility company Exelon from 2007 to 2013, overlapping with McDonald's director and Ariel Investments CEO John Rogers. Rogers is a current Exelon director who joined the board in 2000. Exelon's proxy notes that McDonald's is a customer, paying Exelon $14 million in 2013.

–McKenna served as Aon's longest-tenured director, stepping down in 2012 after more than 40 years. McDonald’s director Rogers joined the Aon board in 1993, serving also until 2012. Rogers has been on the McDonald's board since 2003.

–McDonald's director Cary McMillan, CEO of True Partners Consulting, is chairman of the Board of Governors for the School of the Art Institute of Chicago. Fellow McDonald's director Walter Massey is president of the School of the Art Institute of Chicago.

–Director Richard Lenny joined private equity firm Friedman, Fleischer & Lowe as an operating partner in 2011 and is now a senior advisor. This September his fellow McDonald's board member Robert Eckert became an operating partner. They've overlapped on the McDonald's board since 2005.

Corporate governance expert Nell Minow notes that Chicago has historically had more inbred boards than other cities, and she believes that may very well still be the case. "What you see at McDonald's is what we expect from boards circa 1990, not circa 2014," she says. "It's like McDonald's hasn't gotten the message that most boards have about how important it is that you demonstrate a very clear picture of independence to the shareholder community."

Elson of the University of Delaware says that the closer directors get outside of the board room, the more concerning it is. These relationships have the potential to introduce elements into the mix that might make it hard to be objective. He adds, "Any time you see significant length of tenure and interrelationships between directors, it raises questions of effectiveness."

And the company thinks focusing on food quality and digital payments is the trick to shaking its longstanding doldrums.

The world’s largest restaurant chain by revenue reported on Monday that comparable sales last quarter fell 3.3% (worse than the 3% drop analysts expected, according to Consensus Matrix) and that profit fell 28%, with trouble in every single major market.

McDonald’s has been hit by a number of setbacks, ranging from Russia closing some of its restaurants, to a scandal engulfing one of its big meat suppliers in China last summer. At home, McDonald’s is dealing with aggressive competition, especially for breakfast offerings, lower income customers cutting down on eating out and menu additions that have annoyed guests by slowing service.

McDonald’s CEO Don Thompson said in a statement more bad news was coming: “The internal factors and external headwinds have proven more formidable than expected and will continue into the fourth quarter.” He added that U.S. comparable sales growth would likely be negative for the 12th straight month.

In the U.S., comparable sales for the quarter ended Sept. 30, comparable sales decreased 3.3% as fewer customers came in to eat and competitors ramped up their efforts. More alarmingly for McDonald’s, its operating profit for the region fell 10% as efforts to fix its ongoing, growing U.S. problems fell flat.

So Thompson said the company’s new U.S. president, Mike Andres, is flattening the unit’s organizational structure to make it nimbler and to let restaurants respond more quickly to local needs. He is also updating its marketing to emphasize food quality, and simplifying the menu to reduce wait times.

Comparable sales in Europe--McDonald’s biggest market--were weak, falling 1.4%, more than expected, as the ongoing crisis in Russia and Ukraine hurt sales. Over in Asia, a big hit to business in China and Japan results led comparable sales to fall 9.9%

Thompson has a big job ahead of him, so he laid out some broad principles and initiatives he hopes will fix McDonald’s globally. Those include investing in updating its image and service, along with new technology to update McDonald’s for today, make better use of tech to facilitate ordering, payment and mobile offers (it will accept Apple Pay) and in what sounds like a hint of potential job cuts, a review of the company structure to determine how much fat there is and whether money can be redeployed to its digital strategy.

But the McDonald's MCD of today does not seem like the same land of opportunity it must have been when Skinner got his start at the company.

You'd think time had stood still if you looked at the wages of Cherrie Velestine, 27, a 10-year veteran of the golden arches, who works in a North Charleston, S.C., restaurant. She started at McDonalds in 2004 at $7.35 an hour and despite putting in repeated requests for a raise, she has never received one in all the years she has worked there, she told me. Velestine is not the only fast-food worker with stagnant pay. A Demos report entitled “Fast Food Failure” found that fast-food "wages have increased just 0.3 percent in real dollars since 2000."

Relying on workers like Velestine, from 2004 to 2013, McDonald's has more than doubled its reported net income from $2.3 billion to $5.6 billion in its latest filing. If Velestine had received a pay boost at a percentage equal to McDonald's rising net income, she'd be making $18.02 an hour right now and wouldn't have had to travel to Chicago to ask for $15.

Velestine relies on food stamps and other family members' help to survive and support her family. Although she has asked to work 40 hours a week, she only gets 28 - 29 hours, she told me.

McDonald's CEO Don Thompson, an electrical engineer by training who was born in 1963 and fortunate to have a grandmother who helped him through college, earned $9.5 million last year, the restaurant chain reported, more than double his earnings just two years ago. "The average hourly wage of fast food employees is $9.09, or less than $19,000 per year for a full-time worker, though most fast food workers do not get full-time hours," Demos found.

Thompson's pay for just one day (based on 365 days a year) in 2013 was 1.4 times the average annual rate of a full-time fast-food worker. McDonald's did not respond to a request for a comment on worker pay issues. "'We believe we pay fair and competitive wages," Thompson said at the company's shareholders meeting.

The Demos study found that the accommodations and food services sector, on average, has experienced higher levels of pay disparity than any other sector in the U.S. economy from 2000 to 2012 — and the CEO-to-average-worker pay ratio is highest in fast-food, having grown 470% over that time period.

The SEC has not yet finalized the Dodd-Frank requirement for disclosure of CEO-to-median-worker pay, so it's impossible to compare McDonald's CEO pay to the median or average McDonald's worker pay, said Catherine Ruetschlin, the Demos study author.

Velestine says a raise to $15 an hour would mean a lot to her. "It would mean they appreciate me, and it would help me provide for my family without other people's help," she told me. She is determined to get her due: "We will never quit fighting until we get $15. We'll be back until we get what we want."

When Adriana Alvarez, 22, who has completed one year of college, joined a Cicero, Ill., McDonald's in 2010, she says she was earning $8.50 an hour. Now, her pay is up to $9.15, a 7.6% increase. Meanwhile, the company's earnings rose 13% from 2010 to 2013, and Thompson's pay has risen 130% during that time.

A cashier and runner who also handles the drive-thru, Alvarez relies on government assistance and says $15 an hour would help her "provide a better future for her two-year-old son, a better place to live, with better schools." Thompson no doubt knows the importance of such opportunities. "His grandmother, fearing growing gang activity … moved him to Indianapolis," when he was 10 years old, the Chicago Tribunereported in 2012.

Alvarez and Velestine were both arrested at the protests on May 21, along with Dre Sinley, 24, who works part-time at a McDonald's in the Tampa, Fla. area to supplement his full-time job at Arby's and support his wife and five-year-old daughter. Sinley has an associate's degree in criminal justice, but police jobs in Tampa are scarce. Despite working two jobs, his family must rely on food stamps. He had scholarships and grants to attend college, he says, but he also has student loans to pay off.

"Fifteen dollars an hour would allow me to provide for my family," he says, "to not worry about paying the rent, buying clothes, or paying the electric bill. Today if the car breaks down, I can't pay to fix it because I won't be able to pay the other bills. There's constant worry."

Studies have shown that chronic, prolonged stress like the kind endured by the unemployed and low-wage earners leads to serious health problems and shortens lives. All three of the McDonald's workers I talked to told me they do not receive company benefits like health insurance.

Despite Thompson's assertion that the home of the Big Mac offers fair pay, some restaurant analysts consider the issue a major risk for the industry. In an April 15 note, Barclays predicted wages "will be top of mind as we look to 2015." An April 9 note by Citi analysts suggests that win-win wage solutions may be possible: "several franchisees ... have raised prices to offset [an] increase [in labor costs] with no noticeable consumer pushback."

Looking at the broader economy, minutes from the Federal Reserve's meeting at the end of April show "the share of workers employed part time for economic reasons moved up" and "slack in labor and product markets [are] anticipated to diminish slowly."

On April 23, a Citi analyst report using data from marketing firm MWW, showed that McDonald's holds a very prominent position in social media, as measured by both "total audience strength" and "engagement." As we roll into summer, this could be a boon or a blessing depending on how McDonald's chooses to respond to millennial workers like Velestine, Alvarez, and Sinley. If employees are willing to engage in civil disobedience at corporate headquarters, can disruptive social media campaigns be far behind?

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (thevaluealliance.com), a board education and advisory firm.

]]>http://fortune.com/2014/05/30/what-mcdonalds-owes-its-workers/feed/0<> on March 18, 2014 in Oakland City.clyons2014McDonald’s boosts shareholder buybacks to $20 billionhttp://fortune.com/2014/05/28/mcdonalds-boosts-shareholder-buybacks-to-20-billion/
http://fortune.com/2014/05/28/mcdonalds-boosts-shareholder-buybacks-to-20-billion/#commentsWed, 28 May 2014 21:32:58 +0000http://beta.fortune.com/?p=499156]]>FORTUNE — While McDonald’s MCD may be struggling to sell more of its Big Macs and fries, the fast-food giant still has hordes of cash at its disposal, and it’s ready to give $20 billion of it back to shareholders.

The company will put $18 billion to $20 billion toward dividends and share repurchases over the next three years, said CEO Don Thompson at an investor conference Wednesday. That is as much as a 20% increase over the amount of funds returned to investors in the past three years.

The increased investor payment is part of Thompson’s “Plan to Win,” a strategic playbook that is intended to boost the company’s value. McDonald’s also plans to re-franchise at least 1,500 restaurants across Asia, the Middle East, Africa, and Europe, as well as redistribute its spending to focus on digital opportunities. This plan is “guiding the execution of our global growth priorities,” said Thompson.

The restaurant chain missed first-quarter profit expectations as its sales declined across its existing U.S. stores over five straight months. Only recently has the tide started to turn: The company reported flat same-store sales in April.

Even though sales have stagnated, the company brought in more than $28 billion in revenue last quarter and has an additional $2.7 billion of cash sitting on its balance sheet. The infusion of money to investors may help boost shares of the company, which have stagnated. The company gained 1.1% in share value over the past 12 months compared to a 15% gain in the Standard & Poor’s 500 index.

The demonstrations in Oak Brook, Ill. are a reminder of the growing economic inequality in America. At McDonald's, workers making the federal minimum wage earn $7.25 an hour, while those in Illinois take in $8.25 at the state's minimum wage. By contrast, McDonald's CEO Don Thompson made approximately $9.5 million last year, which means it would take a minimum wage worker more than a million hours of work to earn Thompson's annual salary.

We could blame greedy corporate executives for the pay gap, but that would be too simplistic. It doesn't capture the changing corporate structures central to understanding the rise of low-wage work at some of America's biggest companies.

McDonald's, for instance, doesn't actually employ most of its workers; instead, they work for individual franchise restaurants that operate as independent businesses and pay fees to use the company's brand and sell its products - from which buns they buy to how signs are displayed. Beyond that, however, the individual franchise owner is technically the employer and therefore responsible for setting and paying workers' wages.

It's important to highlight the business structure of franchising because it raises more questions than a simple case of an employer hiring an employee. In the case of McDonald's, who exactly is the employer? Is it the national corporation, which collects fees from franchise owners and dictates the look, feel and operations of the restaurants? Or is it the individual franchisees, who are legally responsible for hiring the workers?

These ambiguities lie at the heart of wage disparities at McDonald's and at other companies beyond the fast-food industry. Companies separate out direct employment to other parties, such as independent contractors, franchise owners, or logistics coordinators along the supply chain. New technologies and a more favorable legal environment have allowed companies to maintain their ability to enforce the standards they want for a brand even if they are no longer the direct employer of most of their workforce. As more employment relationships begin to "fissure," as Boston University economist David Weil calls it, they upend the way we understand typical work arrangements.

This trend is clear across low-wage workplaces. Besides McDonald's, janitorial companies like Coverall are organized as either franchises or independent subcontractors. Trucking companies classify workers as owner-operators, which exempts the companies from paying for worker's compensation or unemployment insurance. Even football cheerleaders are often classified as independent contractors rather than employees, which have prompted five NFL squads from the Cincinnati Ben-Gals to the New York Jets Flight Crew to sue their teams. The separation of employment can also span many levels: In a 2006 AT&T cell tower incident in Talladega, Ala., the telecom company hired a management firm, who subcontracted a tower company, who subcontracted another tower company to actually do the work.

By shifting employment outward, companies no longer have to deal with setting wages, providing benefits, or meeting the requirements of labor laws. As a result, many of the risks and costs associated with a standard employment arrangement are off the company's books. This has increased profitability, particularly in the eyes of shareholders: Companies can boost their net earnings by drastically reducing their costs.

These changes have not eliminated the risks, however. They have shifted it onto other businesses and workers. Sub-providers have lower profit margins, which make it more difficult to raise worker wages. One fast food industry analyst estimated that up to one in four McDonald's actually loses money and is only propped up by more profitable "sister" franchises with the same owner. It also increases the likelihood of unfair work conditions: A 2012 study by Weil and Min Woong Ji found that franchise-owned stores were 24% more likely to violate laws and owed 50% more in back wages per employee. In sum, Weil writes, "Shifting work outward allows redistribution of gains upward."

Thus, the protestors outside of McDonald's headquarters face an impasse. On the one hand, workers cannot make ends meet for themselves or their families on low wages, no benefits, and unstable jobs. On the other, unless the structure of the "fissured workplace" is altered, there is little room for improvement in industries where the direct employers are themselves also squeezed. Franchisees are already frustrated with low margins and high costs for upgrades, which they have to pay for themselves. A recent survey by Janney Capital Markets found that McDonald's franchisees rated their relationship with corporate management a 1.73 on a scale from one to five.

Addressing the new story of economic insecurity in America requires fixing the underlying causes of our low wage economy. Small fixes like raising the minimum wage or more aggressively pursuing labor violators are important, but they alone will fall short of altering the trajectory toward a low-wage economy in which costs are rising faster than incomes. And helping low-wage workers through tax subsidies might alleviate some pain in the short term, but it will do nothing to address the structural issues in these new employment relationships that drive down wages and make work more tenuous than in the past.

Instead, we need to rethink the entire way we understand the workplace in the modern economy. Policies to connect the bottom and the top - rather than just the bottom with the next level up - will ensure that the companies more equally share the risks and costs of work. Current legal structures do very little to cover the imbalances in these workplaces: despite the historic recent settlement between Wal-Mart WMT and workers employed by its largest subcontractor, Schneider Logistics, most courts have not held companies responsible for work issues arising within franchises, subcontractors, or along the supply chain.

As long as McDonald's can claim that they bear no responsibility for the plight of the workers who are toasting the buns, shareholders at the meeting in Oak Brook will benefit from the changing workplace that shifts risks onto workers and franchisees. But low-wage workers everywhere will be left with a huge bill.

Josh Freedman is a policy analyst in the economic growth program at the New America Foundation, where he writes and researches about U.S. economic and social policy.